What Is Federal Home Loan Mortgage Corporation (FHLMC)?
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) that plays a critical role in the U.S. housing market within the broader category of mortgage finance. Chartered by Congress, its primary mission is to provide liquidity, stability, and affordability to the nation's secondary mortgage market. Freddie Mac does not originate home loans directly to consumers; instead, it purchases residential mortgages from mortgage lenders, primarily smaller banks and credit unions. These purchased loans are then either held in its portfolio or, more commonly, pooled together and transformed into mortgage-backed securities (MBS) which are sold to investors in the capital markets. By doing so, Freddie Mac replenishes the funds available to lenders, allowing them to issue new mortgages and support continued homeownership.
History and Origin
The Federal Home Loan Mortgage Corporation was established by the U.S. Congress through the Emergency Home Finance Act of 1970. This creation aimed to introduce competition into the burgeoning secondary mortgage market, which had largely been dominated by Fannie Mae (Federal National Mortgage Association) since its privatization in 1968. Freddie Mac's initial purpose was to provide a reliable source of funding for savings and loan associations and smaller financial institutions, helping to mitigate interest rate risk for these lenders and ensuring a continuous flow of capital for home financing11.
Over the decades, Freddie Mac expanded its operations, becoming a cornerstone of the housing finance system. However, the rapid expansion and accumulation of mortgage assets, particularly during the boom years leading up to the 2008 financial crisis, exposed significant vulnerabilities in the GSE model. As the market for subprime and other risky mortgages collapsed, Freddie Mac, along with Fannie Mae, faced severe financial distress. On September 6, 2008, amidst the escalating crisis, the U.S. government, through the newly established Federal Housing Finance Agency (FHFA), placed both Freddie Mac and Fannie Mae into conservatorship. This unprecedented intervention was designed to stabilize the mortgage markets and prevent a broader collapse of the financial system10. The conservatorship, initially intended as a temporary measure, marked one of the most significant government interventions in private financial markets in decades and remains in effect today9. For more details on the rationale and impact of this government action, a staff report from the Federal Reserve Bank of New York offers further insight8.
Key Takeaways
- The Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, is a government-sponsored enterprise (GSE) that provides liquidity and stability to the U.S. mortgage market.
- Freddie Mac purchases mortgages from lenders, packages them into mortgage-backed securities (MBS), and sells them to investors.
- It does not originate loans directly but sets guidelines for conforming loans that it is willing to purchase.
- Freddie Mac was placed into government conservatorship in 2008 during the financial crisis and remains under the oversight of the Federal Housing Finance Agency (FHFA).
- Its activities help ensure that funds are available for new mortgages, promoting affordable homeownership.
Interpreting the Federal Home Loan Mortgage Corporation (FHLMC)
Understanding the Federal Home Loan Mortgage Corporation involves recognizing its systemic importance to the U.S. housing finance system. Freddie Mac, by purchasing and securitizing mortgages, effectively removes credit risk from the books of individual mortgage lenders. This transfer of risk frees up capital for lenders, allowing them to originate more loans. For homebuyers, this process translates into greater availability of mortgage credit and generally lower interest rates than might otherwise exist if lenders had to hold all loans on their balance sheets.
The presence of Freddie Mac means that mortgage loans, even those originated by small local banks, can be standardized and sold into a vast national market. This standardization helps create a liquid market for mortgages, which benefits both borrowers and investors. Investors can purchase mortgage-backed securities with the assurance of a Freddie Mac guarantee on timely principal and interest payments, enhancing their attractiveness as investments.
Hypothetical Example
Imagine a small, local credit union, "Community Savings Co-op," which has a limited amount of funds available to lend for mortgages. A local family approaches Community Savings Co-op for a home loan. The credit union originates a mortgage for the family. Without Freddie Mac, Community Savings Co-op might quickly exhaust its funds, limiting its ability to offer new mortgages until the existing loans are repaid.
However, because Community Savings Co-op originates conforming loans that meet Freddie Mac's underwriting standards, it can sell this mortgage to Freddie Mac. Freddie Mac then bundles this loan with thousands of other similar mortgages purchased from various lenders nationwide to create a mortgage-backed security. This MBS is then sold to institutional investors. The cash received by Community Savings Co-op from the sale of the mortgage to Freddie Mac immediately replenishes its lending capacity, allowing it to offer new home loans to other families in the community. This process illustrates how Freddie Mac facilitates a continuous flow of funds in the housing market.
Practical Applications
The Federal Home Loan Mortgage Corporation's operations have several practical applications across the financial landscape:
- Mortgage Availability: By providing a reliable buyer for mortgages, Freddie Mac ensures that mortgage lenders nationwide, particularly smaller institutions, have the capital to continue offering loans. This is crucial for maintaining widespread access to homeownership.
- Standardization of Mortgages: Freddie Mac's underwriting guidelines for the loans it purchases contribute to the standardization of mortgage products across the U.S. This uniformity makes mortgages more fungible and easier to trade in the secondary mortgage market.
- Investment Opportunities: Freddie Mac's mortgage-backed securities (MBS) are a significant asset class in fixed-income investing. These securities offer investors a stream of income backed by real estate assets and the implicit, and often explicit, guarantee of a government-sponsored enterprise.
- Market Data and Research: Freddie Mac also publishes extensive data and research on the U.S. housing market, including weekly average mortgage rates, which are widely cited by economists, real estate professionals, and the media as a benchmark for the cost of home loans7.
The Federal Housing Finance Agency (FHFA) exercises significant oversight over Freddie Mac, conducting examinations and setting regulatory standards to ensure the GSE operates in a safe and sound manner. This oversight includes monitoring financial condition, risk management practices, and capital adequacy6.
Limitations and Criticisms
Despite its essential role, the Federal Home Loan Mortgage Corporation has faced considerable limitations and criticisms, particularly concerning its hybrid public-private structure and its role in the 2008 financial crisis.
One primary criticism stems from the "implicit guarantee" that the U.S. government would back Freddie Mac's obligations due to its GSE status. This perception allowed Freddie Mac to borrow at lower interest rates than purely private entities, giving it a competitive advantage. Critics argued that this created a moral hazard, incentivizing the company to take on excessive risk since the ultimate losses would fall to taxpayers5.
The massive losses incurred by Freddie Mac and Fannie Mae during the subprime mortgage crisis in 2008 directly led to their placement into government conservatorship. This event highlighted the systemic risks posed by their size and structure. The lengthy duration of the conservatorship, now over a decade, has also drawn criticism, with some arguing that it was intended as a temporary fix, not a long-term solution, and has exposed taxpayers and the financial system to ongoing risks3, 4.
Furthermore, the extensive government oversight through the FHFA, while necessary, also imposes limitations. The FHFA continuously reviews and, at times, adjusts its directives regarding Freddie Mac's operations, influencing everything from the types of products offered to risk management strategies. For instance, recent changes by the FHFA have involved rescinding certain advisory bulletins and ending specific credit programs, indicating an ongoing reassessment of the GSEs' roles and responsibilities within regulatory boundaries2.
Federal Home Loan Mortgage Corporation (FHLMC) vs. Federal National Mortgage Association (FNMA)
The Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, is often discussed alongside the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae. Both are government-sponsored enterprises (GSEs) with the shared mission of providing liquidity, stability, and affordability to the U.S. mortgage market. Despite their similar functions and joint conservatorship under the FHFA, there are historical and operational distinctions.
| Feature | Federal Home Loan Mortgage Corporation (Freddie Mac) | Federal National Mortgage Association (Fannie Mae) |
|---|---|---|
| Founding | Chartered by Congress in 1970 to provide competition to Fannie Mae. | Created in 1938 as part of the New Deal; privatized in 1968. |
| Lender Focus | Primarily purchases mortgages from smaller financial institutions (e.g., credit unions, smaller banks). | Primarily purchases mortgages from larger commercial banks. |
| Loan Programs | Offers various loan programs (e.g., Home Possible, CHOICERenovation). | Offers various loan programs (e.g., HomeReady, HomeStyle Renovation). |
| Common Confusion | Both purchase and securitize conventional residential mortgages that meet specific guidelines, known as conforming loans. | Both operate in the secondary mortgage market, distinct from direct lenders. |
While their operational distinctions regarding the types of lenders they primarily serve have historically been a key differentiator, the fundamental role of both entities in supporting the flow of mortgage credit and enabling the creation of mortgage-backed securities remains consistent1.
FAQs
What is the main purpose of Freddie Mac?
The main purpose of the Federal Home Loan Mortgage Corporation (Freddie Mac) is to provide liquidity, stability, and affordability to the U.S. mortgage market. It achieves this by purchasing mortgages from lenders, thereby freeing up capital for those lenders to issue new loans to homebuyers.
Does Freddie Mac lend money directly to homebuyers?
No, the Federal Home Loan Mortgage Corporation (Freddie Mac) does not lend money directly to homebuyers. Its role is to operate in the secondary mortgage market, buying loans from primary mortgage lenders like banks and credit unions.
What happened to Freddie Mac during the 2008 financial crisis?
During the 2008 financial crisis, the Federal Home Loan Mortgage Corporation (Freddie Mac), along with Fannie Mae, faced severe financial distress due to widespread defaults on mortgage loans. To prevent their collapse and stabilize the U.S. housing market, the U.S. government placed both entities into conservatorship under the Federal Housing Finance Agency (FHFA). They remain under this conservatorship today.
Are Freddie Mac loans government-insured?
No, loans purchased and guaranteed by the Federal Home Loan Mortgage Corporation (Freddie Mac) are typically conforming loans, which are not directly insured by the government. Instead, Freddie Mac itself guarantees the timely payment of principal and interest on the mortgage-backed securities it creates from these loans. Government-insured loans are typically those backed by agencies like the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA).